The title and subheader alone deserve comment. First of all, absolutely no-one outside the inhabitants of the incestuous ivory tower of Keynesian and monetarist mainstream economists and the central planning bureaucrats infesting central banks is in any way “stumped” by “low inflation”.

We suspect that there are billions of consumers in the world who would prefer prices to stop rising altogether. In fact, we believe they not only want them to stop rising, they actually want them to decline. But what do they know? Mr. Summers and his central planning comrades have decreed that it is “bad” for them if they are able to buy more rather than less with their income!

As to the perceived lack of policymaker “credibility”: They don’t deserve any. The world’s economic malaise is to 100% their fault. If only it were true that they are “not acting”! The truth is unfortunately that they continue to heap folly upon folly.

Need we remind Mr. Summers of the Bank of Japan’s decision to implement the perversion of negative deposit rates, or the decision of the Riksbank to lower its negative rates to minus 50 basis points in the middle of a raging housing and consumer credit bubble, even though Sweden’s GDP is forecast to grow by 3%?

In an unhampered free market economy, mildly declining prices would be the rule, not the exception. In fact, the time period during which the US experienced the by far largest real economic growth per capita in history was one during which consumer prices steadily declined.

1869 – 1918 – the by far biggest and most equitable increase in US real economic output per capita in history was recorded in this time period. There was no Federal Reserve and government was but a footnote in most people’s lives. Federal spending amounted to less than 4% of GDP by 1910. People used sound money and a steady, mild decline in consumer prices took place – click to enlarge.

Mr. Summers urgently needs to familiarize himself with Hayek’s 1928 critique of the theories of two of the intellectual forebears of Keynes, the US-based economic cranks William Foster and Waddill Catchings. Hayek showed clearly that real economic growth has neither anything to do with spurring consumption spending, nor does it require any “price inflation”.

However, this insight requires one to understand capital theory, and to recognize that capital is heterogeneous and not a homogeneous, self-generating blob. It requires one to understand the inter-temporal interplay between saving, investment, production and consumption.

With respect to so-called “inflation” – the term originally designated an increase in the money supply. This definition is also the only one that makes any sense – both semantically and in terms of economic theory.

Inflation (in its original meaning of monetary inflation) has numerous possible effects. An increase in the prices of consumer goods is only one of these possible effects, and by no means the most pernicious one. What inflation invariably does cause are changes in relative prices in the economy.

This has far-reaching consequences, of which two of the most prominent ones are wealth redistribution (in practice largely from the poor to the rich) and the falsification of economic calculation. This in turn leads to capital malinvestment and the boom-bust cycle. In other words, these are ultimately the things of which Mr. Summers thinks we ought to have more of!

With regard to the change in the meaning of the term “inflation”, Ludwig von Mises notes in Human Action:

“What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism. […]

[T]there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name.”

(emphasis added)

What is actually the true inflation situation? Let us look at three charts illustrating it.

A depiction of the flood of money that has been produced in Europe since 1990. Still not enough inflation? – click to enlarge.

And now for a real stunner:

Since we don’t have sufficiently granular data available to construct a TMS version of China’s money supply, we are simply using China’s official broad money supply aggregate M2 as a stand-in for the moment. Note that the growth rate of the narrow gauge M1 is even greater, especially in the short term. In fact, the recent acceleration in China’s narrow money supply gauge is so stunning that we are showing the chart of M1 separately below. Again we must ask: how much inflation does Mr. Summers think would actually be enough? – click to enlarge.

Summers’ Ideas – A Doctrine as Old as it is Bad

Summers’ article starts out by describing a hypothetical scenario (that he apparently believes could not possibly eventuate anytime soon), in which official measures of “consumer price inflation” and the associated market expectations as revealed by forward inflation rates and the spreads between “inflation-protected” and run-of-the-mill government bonds indicate sharp price increases.

Summers concludes it would be considered quite reckless if central banks were to insist on keeping monetary policy loose in such a situation. This is undoubtedly correct, ergo, so far so good. It gets real bad though when he moves on from this as of yet hypothetical danger to the one we are allegedly facing now:

“At present we are living in a world that is the mirror image of the hypothetical one just described. Market measures of inflation expectations have been collapsing and on the Fed’s preferred inflation measure are now in the range of 1-1.25 per cent over the next decade. Inflation expectations are even lower in Europe and Japan. Survey measures have shown sharp declines in recent months. Commodity prices are at multi-decade lows and the dollar has only risen as rapidly as in the past 18 months twice during the past 40 years when it has fluctuated widely.”

So what? First of all, it is a great relief to consumers that consumer goods prices have so far remained low, as they haven’t seen their real median income rise in decades. Consumers need to rebuild savings and prepare for an increasingly uncertain future. Making them suffer the ignominy of rising consumer prices would make their situation even more precarious.

Secondly, the assumption that market-based “inflation expectations” are a meaningful indication of what will happen to prices in the future requires quite a leap of faith. In reality, markets are often dead wrong, especially near medium to long term turning points. Meanwhile, the fact that the free-floating fiat currency regime is highly unstable and volatile is the fault of the system as such. Before governments decided to willfully destroy the gold standard, the global economy managed to do splendidly with sound money.

Summers continues:

“The Fed’s most recent forecasts call for interest rates to rise almost 2 per cent in the next two years, while the market foresees an increase of only about 0.5 per cent. Consensus forecasts are for US growth of only about 1.5 per cent for the six months from last October to March. And the Fed is forecasting a return to its 2 per cent inflation target on the basis of models that are not convincing to most outside observers.”

Yes, the Fed couldn’t forecast its way out of a paper bag, and its “models” make no sense. What else is new? This is actually a good argument to do away with central monetary planning. It simply doesn’t work, mainly because it cannot work. The obsession with returning to the arbitrary “2% inflation target” makes even less sense – in fact, it is extremely dangerous.

US consumer price index – this consistent and extreme rise in prices has produced no economic benefits whatsoever for society at large. Only a small coterie of inflation profiteers has benefited at everybody else’s expense – click to enlarge.

Summers continues:

“Despite the apparent symmetry, the current mood is nothing like the one posited in my hypothetical example. While there is certainly substantial anxiety about the macroeconomic environment, as judged from the meeting of the Group of 20 big economies in Shanghai last week, there is no evidence that policymakers are acting strongly to restore their credibility as inflation expectations fall below target.”

We can only repeat our “if only” sigh here. Unfortunately, there is plenty of evidence that the planners are going “total retard” in their attempt to force rising consumer prices into being. As to growing “macroeconomic anxiety” – it is certainly justified. However, the sorry state of the global economy is the result of precisely the policies Summers advocates. Why would anyone expect that more of the same will make the situation any better? This is insanity.

Summers continues:

“In a world that is one major adverse shock away from a global recession, little if anything directed at spurring demand was agreed. Central bankers communicated a sense that there was relatively little left that they can do to strengthen growth or even to raise inflation. This message was reinforced by the highly negative market reaction to Japan’s move to negative interest rates. No significant announcements regarding non-monetary measures to stimulate growth or a return to target inflation were forthcoming, either.”

First of all, contrary to what Summers is implying here, recessions are not the result of “unexpected shocks” that drop from the sky unbidden, like an asteroid strike. They are solely the result of the damage done during the preceding boom periods, which as noted above are in turn the result of the policies Summers favors.

The worry that a recent “lack of announcements” regarding various new central bank or non-monetary policy-related government measures means that such measures won’t be forthcoming is completely unfounded. If anything, we should be greatly worried about the exact opposite.

Regarding the market’s negative reaction to the BoJ joining the monetary cranks in Europe by imposing negative interest rates: That was the market sending a message. It is saying that this lunacy is already one step too far, and that central bankers would do better to back off unless they want to see a complete and utter catastrophe unfold.

As Ludwig von Mises reminds us in Human Action:

“It is not necessary to point out the consequences to which a continued deflationary policy must lead.Nobody advocates such a policy. The favor of the masses and of the writers and politicians eager for applause goes to inflation. With regard to these endeavors we must emphasize three points. First: Inflationary or expansionist policy must result in over-consumption on the one hand and in malinvestment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”

(emphasis added)

Why would anyone want to pursue policies that are apodictally certain to make things worse? As far as we can tell, at the root of this is a mixture of economic illiteracy and political expediency. Summers represents both in equal measure in our opinion.

Someone has wisely produced a painting of Mr. Summers. This makes it possible to burn him in effigy.

Image credit: “Zach”, via newyorker.com

Summers concludes his jeremiad with a recommendation – as can probably be imagined, it is indeed a battle-cry for more of the same. The fact that it hasn’t worked so far has not been taken as evidence that it may actually be the wrong thing to do. In typical Keynesian fashion, Summers is convinced that this simply means that not enough of it has been perpetrated yet (after more than 26 years of these very same policy prescriptions failing in Japan, it certainly takes quite a bit of chutzpa to continue to make such assertions):

“Today’s risks of embedded low inflation tilting towards deflation and of secular stagnation in output growth are at least as serious as the inflation problem of the 1970s. They too will require shifts in policy paradigms if they are to be resolved.

In all likelihood the important elements will be a combination of fiscal expansion drawing on the opportunity created by super low rates and, in extremis, further experimentation with unconventional monetary policies.”

(emphasis added)

Say what? What “paradigm shift” is it that Summers thinks is required? The world is already quite close to maximum lunacy in terms of “monetary experimentation” and deficit spending. As to the danger of “secular stagnation” (a term Summers has apparently coined himself), if there really is such a danger, then it is the result of past economic interventionism.

Even more interventionism cannot possibly improve the situation, it can only make it even worse. Further above Summers mentions the alleged need to spur “aggregate demand”, which one always tends to come across in such screeds. It is a complete economic fallacy, as it is simply putting the cart before the horse. One cannot consume oneself to prosperity.

Ludwig von Mises provides us with the following assessment:

“A retailer or innkeeper can easily fall prey to the illusion that all that is needed to make him and his colleagues more prosperous is more spending on the part of the public. In his eyes the main thing is to impel people to spend more. But it is amazing that this belief could be presented to the world as a new social philosophy. Lord Keynes and his disciples make the lack of the propensity to consume responsible for what they deem unsatisfactory in economic conditions. What is needed, in their eyes, to make men more prosperous is not an increase in production, but an increase in spending. In order to make it possible for people to spend more, an “expansionist” policy is recommended. This doctrine is as old as it is bad.”

This seems obvious enough to us. It helps to know a thing or two about economic theory, but one should be able to recognize the truth of the above statement even if one is merely in possession if a modicum of common sense.

Ludwig von Mises – he and many others have long ago thoroughly debunked the economic fallacies propagated by people like Larry Summers.

Image via cafeliberte.de

Conclusion

What Summers proposes is indeed based on “a doctrine as old as it is bad”. The worrisome economic conditions of today are simply the result of the consistent implementation of this doctrine over the past several decades. We are all very lucky that the market economy has been able to continue to create wealth even in the severely hampered state it finds itself in nowadays. However, it cannot be taken for granted that this will continue if interventionist burdens on the economy continue to be ratcheted up.

It should be clear that as long as people like Mr. Summers and his cohorts in academe and policymaker circles are holding sway, things are absolutely certain to get worse. In fact, it is quite likely that there will eventually be a truly catastrophic denouement if the world continues down this path.

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9 Responses to “Mr. MORE!”

Blowing a bond bubble forces bond holders, like pension funds, to jack up their effort on managing their bonds – they aren’t going to want to hold a negative-yield bond to maturity, they are forced to sell them when the price goes up in order to get any actual yield. And what do they do with the proceeds? Buy more bonds and play the same game perpetually, blowing the bubble bigger.

It’s musical chairs, and slowly almost everyone loses. Japan is showing the bubble doesn’t even have to pop, it just gets so big it suffocates anyone its way. (I’m picturing Rover from The Prisoner series now.) The spreads become meaningless.

I think what LS meant to say is that inflation is preferred when confronted with the characteristics of using a debt based currency system , much like saying “I prefer the boom over the bust” .

Rather than focusing on the dollar’s application as a medium of exchange (debt based), it’s best to focus on the price model that’s developed at “the other end”. The price model allows and supports debt-free trades. If this fact confuses anyone, just compare the price of gold with the price of another debt-free widget and trade the gold for the widget , directly. There is no debt used in the trade. The dollar only acts as a relative price measure.

Summers is a most brilliant fellow, you only need ask him. And yet one of the central pillars of general economic theories save one of two is that inflation is good for the growth of GDP. How many macro economic tomes have I read where that is the stated case? Two percent inflation is great for economic growth. No explanation needed, it says so in the book. Yeah, well, Mr Summers I remember the sixties and seventies very well when inflation was well above two percent. Working class people who had bought their houses for five or seven thousand in the forties and early fifties and then finally paid them off and were now retired on social security found their homes valued at damn near twenty times the original cost and property tax increased likewise. Mr Summers, would you please explain again how inflation is good for the growth of GDP? Explain the benefits for me and other consumers.

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